Royal Mail is failing to deliver

The postal-service’s share price is sliding as ‘challenging’ trading conditions persist even though the number of direct competitors has declined.

IG Analyst

2015-11-13T15:59:00+0000

Source: Bloomberg

Royal Mail will announce its first-half results on 19 November, and traders are anticipating revenue of £4.4 billion and adjusted net income of £158 million. These figures compare with last year’s second-half revenue and adjusted net income of £4.8 billion and adjusted net income of £276 million. The company will report its full-year results in May 2016, and dealers are expecting revenue and adjusted net income of £9.18 billion and £339.8 million respectively. These estimates equate to a 1.5% decline in revenue and a 20.6% fall in adjusted net income.

Royal Mail is realising it must speed up its transition from a state-controlled firm to a publicly traded company, and even though a number of its competitors have exited the market, competition is still tough. The volume of letters that Royal Mail is handing is slipping, but the parcel business is expanding.

The decision by Amazon to deliver products itself will hit the company in the short-term, and this is the sort of shock that Royal Mail needs in order for it to improve efficiency and keep costs down. The company has pushed back the time for parcel collections and it has introduced a Sunday parcel delivery to compete with its rivals. Adding to Royal Mail’s woes, however, Ofcom is considering introducing a cap on prices, and the regulatory body will announce its decision in 2016.

Adjusted operating profit was marginally higher last year while revenue was flat and the company confirmed it is on track to achieve its forecast for this year. That said, it also warned Christmas would be crucial and that the market place is ‘challenging’.

Equity analysts are bullish on Royal Mail, and out of the 18 ratings, seven are buys, six are holds, and five are sells. The average target price is 474p, which is 6.7% above the current price.

Royal Mail shares have been on a clear downward trajectory since topping off at £5.32 in Q2 2015. We have seen no signs that the clear downtrend witnessed over the past four months will abate. Yet the past month has seen a clear respect of the key 436p support level – which was established predominantly in April 2015 – and we are now seeing the price respected once more.

The outlook remains bearish given the trend we have seen over recent months, yet with 436p standing in the way of further downside, a close below that level would be necessitated before we see the bearish energy pickup once more. Should this occur, the support levels to watch would be 419p, 415p and 402p. Conversely, a close back above 451p could point towards bullish momentum coming back into play where 456p and 476p would represent the next major resistance levels.

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